The Pitfalls (and Upsides) of Partnering with Entrepreneurs

To en·gage ( n-g j ): To pledge or promise, especially to marry; to draw into; to involve; to enter into conflict with

Corporate executives are exhorted daily by well-meaning public leaders that they should support their local entrepreneurs in order to be good corporate citizens and to bolster local economies. But engagement with entrepreneurs is not a question of conscience or moral imperative; it is a question of strategic self-interest. As any experienced corporate leader knows, engaging entrepreneurs has potentially the same spectrum of pleasure and pain reflected in the formal definition, from the prospect of inextricable involvement including conflict, to the promise of partnership, to the happy possibility of union in blissful corporate matrimony and acquisition.

Let’s start with the pitfalls, because these are often ignored or discounted in frothy discussions about the economic benefits of entrepreneurship. Why would companies avoid engaging with entrepreneurs?

Waste of time. One CEO of a NYSE traded company told me recently that he avoids entrepreneurship networking events in his community because he doesn’t want to be overwhelmed by business seekers pushing cards into his hand, to be followed up by annoying calls to sell anything from gadgets to insurance. Instead, his company has a system for screening and studying the 200 or so proposals they receive annually. He is damned if he will pay attention to each persistent business owner, but then damned as a bad community member if he ignores them. His conclusion — disengage from networking events with entrepreneurs.

Legal entanglement. Many corporate executives have been warned by counsel, or have learned the hard way from experience, that listening to the impassioned pitch of a team of startup entrepreneurs may expose them to litigation further down the road in the event that they embark by themselves upon a similar product or service, even if its origins may be totally unrelated to those described by the entrepreneurs.

Commercial incompetence. Many a corporate executive has braved the skepticism of his or her corporate colleagues and plunged ahead into well-intentioned alliances with startups. Often, they come to find that the majority of new ventures don’t understand corporate decision cycles, purchasing requirements, compliance processes, post sales customer service, and the like. Persuaded initially by the entrepreneur’s whiz bang innovation, corporate executives can then find themselves stuck in a morass of very basic coaching and grooming of their young new partners on the one hand, while fending off the cries of delayed shipments or poor quality from customers further down the line.

Financial fragility. Intrinsic in entrepreneurship is a long period of living in a twilight fluctuating between breakthrough market success and breakdown (i.e. going out of business) when revenues are too few too late, and expenses are too many too soon. Many corporate executives fail to realize just how close to the precipice many startups are. But that is the territory of entrepreneurship — even with deep financial backing from the rare venture capitalist or angel investor (yes, these are the exceptions in entrepreneurship, not the rule), long term viability of any venture is far from guaranteed and can leave the corporate partner in the lurch. (No wonder the experienced executive frequently insists that software code be placed in escrow.)

Then there’s the upside. Of course, engagement with entrepreneurs can lead to innovative new products, lucrative investments, new supply chains, advanced technology, and a more creative corporate culture. No one can say with certainty whether or under what circumstances the potential benefits outweigh the potential pitfalls. But if you do believe, as many corporations are learning, that the balance is potentially positive if handled well, then here are a few suggestions for improving the experience and increasing the value:

Define “engagement” at the most senior management levels as a process that has to be learned over a long time, with lots of experimentation and learning from mistakes, in order to derive the benefits of engaging entrepreneurs, whether through contract, investment, or acquisition.

Allow different functions and divisions autonomy to explore different manifestations of engagements with entrepreneurs, whether through supply chain expansion, joint product development, or technology licensing. These are typically handled by different divisions which may be located, culturally and geographically, far from each other.

Encourage learning across the organization. Although action may be diffuse, the different divisions engaging with entrepreneurs for different strategic purposes have a lot to learn from each other, and can systematically share knowledge and experience by regular meetings and conferences.

Distinguish between global, sector-driven, or division-specific involvement and geographically concentrated ecosystem enrichment. A leading global IT company I know has innovation centers in each of the major continents with the purpose of fostering a broad entrepreneurship ecosystem whether it is directly related to the company’s products and technologies or not. On the other hand, I interviewed a leader of a global life sciences company that was concerned solely with tapping into the best, most specialized technology in a carefully prioritized set of products, regardless of geography

Develop a triage function. It is often surprising to entrepreneurs sitting at the edge of the corporation, but in many cases corporate executives have difficulty engaging with other divisions in their own company. Efficient internal networking and channeling is an ability developed over time within the context of specific corporate structures and cultures. Having an executive function that knows how to interface well with the entrepreneurial community while maintaining credibility and contact within the corporation helps mitigate some of the pain of the process.

Avoid dichotomizing between small and large.Research and practice both reach a clear conclusion: entrepreneurship ecosystems evolve in the context of a rich dialog across the entire spectrum of sizes, technologies and growth rates.The emergence of pure “startup communities” is a revisionist myth. The entire spectrum of private sector companies is interdependent in many complex ways.

Many corporations have withdrawn from entrepreneurial partnering having been burned by a greatly disappointing, acquisition or partnership. But effective alliance management with entrepreneurs is a competency that needs to be strategically defined and tactically executed over time, if executives are to learn the art of entrepreneurial engagement.